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Bear of the Day: CF Industries (CF)

CF Industries Holdings, Inc. (CF) is trying to recover from unsustainable low fertilizer prices. This Zacks Rank #5 (Strong Sell) is expected to see positive earnings in 2018 after struggling in 2017.

CF Industries was founded in 1946 as a fertilizer brokerage operation. It's now a global leader in the manufacture and distribution of nitrogen products, both for agriculture and industrial customers. It's one of the largest fertilizer producers.

It operates nitrogen manufacturing plants in Canada, the UK and the US and distributes plant nutrients through a system of terminals, warehouses and transportation equipment in the Midwestern part of the United States.

CF Industries also owns a 50% interest in an ammonia facility in the Republic of Trinidad and Tobago.

A Big Beat in the Third Quarter

CF Industries has been battling low fertilizer prices the last few years. That appears to be abating.

On Nov 1, it announced its third quarter results and, for the second quarter in a row, beat the Zacks Consensus.

It reported a loss of $0.39 versus the consensus of a loss of $0.55.

Sales rose to $870 million from $680 million in the year ago period as higher sales volumes more than offset the lower average selling prices across most of its segments.

The lower prices still reflected the increased global nitrogen supply.

The company's average selling price for ammonia was $235 per ton in the third quarter of 2017 compared to $287 per ton in the year ago quarter. The average selling price for urea was $195 per ton compared to $203 per ton in the third quarter of 2016.

Additionally, the average selling price for UAN was also lower, at $144 per ton, in the third quarter of 2017 compared to $157 in the third quarter of 2016.

Price Outlook to Remain Volatile in 2018

In the third quarter of 2017, there was a rapid rise in the global price of urea from the unsustainable lows of the second quarter of the year.

Urea barge prices at New Orleans rose to $245 per ton at the end of the quarter from $160 per ton at the beginning thanks to significantly lower Chinese exports, higher energy and production coasts in parts of the world, a weaker US dollar and strong global demand.

Brazil continued to be a major purchaser of nitrogen with imports through the month of August up 50% year-over-year. India was also a big buyer.

2017 Estimates Still on the Decline

The analysts are still pessimistic about 2017. 1 estimate has been lowered in the last 30 days.

CF Industries is expected to see a loss of $0.34 in 2017 compared to a gain of $0.47 in 2016.

But analysts expect a turnaround in 2018. The estimates have been on the increase.

The 2018 Zacks Consensus Estimate is calling for $0.20, which is up from a loss of $0.07 just 90 days ago. The company doesn't report fourth quarter results until late February.

Shares at New 52-Week Highs

Fertilizer investors knew in 2017 that the industry was beginning to turn around. They started buying.

As a result, shares hit new 52-week highs recently.

But given the earnings outlook, shares appear to be really expensive. They've got a forward P/E of 213.

As of the end of the third quarter, the company had $2 billion in liquidity. It's been rewarding its shareholders with a dividend, currently yielding 2.9%.

If you're looking for a fertilizer play with a better earnings outlook, consider Mosaic (MOS). It's a Zacks Rank #1 (Strong Buy) and is expected to grow earnings by 29% in 2018. It also trades with a forward P/E of 20.

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